Tag Archives: BEAD Grants

How the Pandemic Changed Broadband

The Washington Post recently published an article with a series of graphs that shows the impact of the pandemic on a number of economic indicators that range from unemployment, wages, air travel, grocery prices, home prices, and consumer sentiment.

The article got me thinking about the impact of the pandemic on the broadband industry – and there are several important changes that came out of our collective pandemic experience.

Upload Speeds. Probably the biggest change for the industry was that many millions of people suddenly cared about upload speeds as people tried to work from home and students tried to attend class from home. There have always been people who complained about the ability to join a Zoom call, but before the pandemic, ISPs largely ignored them.

The pandemic turned the lack of upload speeds into a crisis. It turns out that upload speeds weren’t just a problem for slow technologies like DSL and hotspots. Cable companies suddenly had a lot of irate customers who were furious that they couldn’t maintain upload connections from home. Cable companies had put a lot of effort over the previous decade into staying ahead of download speed demand. Before customers began complaining about download speeds, cable companies had regularly made unilateral upgrades to download speeds. Every few years, customers would wake up to suddenly faster speeds, and surveys showed that most cable broadband customers were happy with download speeds from cable companies.

But the pandemic suddenly meant that cable technology was seen as inadequate. It was the collective experience of customers during the pandemic that led to the public becoming convinced that fiber is a better technology and that their cable company was behind the times. This prompted the cable companies to scramble to find a faster upload solution, and we’re just now seeing them implement faster upload speeds four years after the start of the pandemic. Only time will tell if current upload speed upgrades will be good enough to turn around the public sentiment that now favors fiber over coax.

Working at Home. The pandemic sent huge number of people home to work, and many of them have never gone back to the office. My consulting firm does surveys, and before the pandemic we rarely saw more than 10% of homes that had somebody working from home even part time. Today, we routinely find communities where 15% or more of homes have somebody working at home full time, and 50% of home have somebody working from home part time.

The main impact for ISPs of having customers working from home is that it created a lot of customers who are intolerant of broadband outages. People who work from home typically lose the ability to work during the outage, and ISPs get instant feedback about outages through complaints and negative online reviews. Our surveys show that intolerance from outages has climbed significantly since before the pandemic. Many customers believe broadband should always work.

Outrage over Lack of Rural Broadband. I’ve been working with rural communities that have been yelling for more than a decade about the problems caused by poor broadband. The pandemic brought this issue to national attention when employers and schools in cities and county seats couldn’t send people home for school or work. There was so much press about the issue that I think this was the first time that a lot of urban and suburban people realized that rural folks don’t have the same broadband.

I firmly believe that the outcry about the impact of the pandemic is what got the BEAD grants put into the IIJA legislation at such a high level of funding. Before the pandemic, the federal government and states would throw a billion dollars or so each year at fixing rural broadband – I used to call this the hundred-year plan to solve rural broadband. It took the pandemic to get bigger dollars thrown at the rural broadband gap. I don’t know if anybody has added up all of the funding, but between state, federal, and local grants, we must be spending nearly $100 billion for new rural broadband networks.

Rural Broadband Is Expensive Today

One of the trends that is a concern for ISPs is plans by State Broadband Offices to force BEAD winners to charge low rates for broadband. I understand some of the rationale behind these attempts.

One argument for lowering rates is that the government is paying a big portion of the cost of building the broadband networks, and it ought to be able to extract concessions from the ISPs for taking the grant funding. That sounds like a reasonable argument until you take a harder look at the places where BEAD funding is going to be used. In most places, BEAD will be used for the most sparsely populated places, which in many instances also have the toughest topography and construction challenges.

The other argument I’ve often heard is that ISPs can provide lower rates because ISPs make a lot of money and can afford it. This might be true for the large national ISPs that can average the revenues from BEAD areas across larger markets with higher margins. But big ISPs don’t want to take on markets that lose money, and they might pass on accepting BEAD in states that insist they charge low rates. Any assumption that smaller ISPs can afford to lose money on a property is badly misplaced – this is like expecting your favorite restaurant to provide low menu prices for a significant percentage of their customers. Such a restaurant won’t be in business for long.

BEAD grants are being offered to ISPs just to get them to consider building networks in places they would otherwise never consider. In many cases, the business case for coming to a BEAD area can barely reach profitability even with a large grant. This is not true of all BEAD places, and there are still some areas covered by BEAD with decent housing density. However, most BEAD areas are high cost to build and high cost to service and maintain after construction. I fully expect a bunch of ISPs who are wading into BEAD to wonder in five years why they ever went through the effort.

What the ISPs are providing as the quid pro quo for the grant funding is building a fast network that can bring a remote rural area into parity with urban broadband. There will be no excess margins in most BEAD business plans that can somehow cover low-cost broadband prices.

The other interesting point that most people are missing is that, for the most part, rural broadband rates are higher today than urban rates. Most areas that get a BEAD network will see lower rates along with a new faster broadband network. How can I say that? Consider the broadband alternatives that exist in rural areas that are BEAD-eligible.

  • Most people using Starlink are now paying $120 per month after shelling out for the receiver.
  • High-orbit satellite broadband is expensive. Consider Viasat. The base plans range from buying 40 gigabytes for $69.99 up to buying 300 gigabytes for $299.99. Extra usage after the data caps can be purchased in small bundles ranging from $9.99 for 5 extra gigabytes to $99.99 for 80 extra gigabytes.
  • Cellular hotspots can be incredibly expensive. The base fee for hotspots sounds reasonable, but the data caps are tiny. Consider AT&T. It sells a hotspot with either a 15-gigabyte data caps for $35 or a 100-gigabyte data cap for $55. The killer is that the overage fee for exceeding those data caps is $10 per gigabyte. Hotspots for T-Mobile, Verizon, and UScellular are similar. I still hear horror stories of families with school children who pay hundreds per month for a hotspot. The only way not to spend money with a hotpot is to greatly curtail broadband usage.
  • While not universally true, many rural fixed wireless providers have high rates. It’s not hard to find rates over $100.
  • The only ‘affordable’ rural broadband alternative is DSL. But it’s getting exceedingly difficult to find or sign up as a new DSL customer in most places, and in many cases the speeds are too slow to be usable. There are exceptions, of course, but most rural folks I’ve talked to tell me that DSL is no longer an option.

Many of the companies building BEAD networks will have rates significantly lower than the current rural rates cited above. BEAD networks will not have data caps, which eliminates the worry spending more than the basic rate. Most rural folks offered BEAD are going to be relieved if asked to pay a decent fixed rate for a connection that is far faster than what they had before. A huge percentage of rural households will see a significant monthly cost decrease just by paying the normal prices of the companies that build BEAD networks.

In saying this, I’m not ignoring the fact that there are households that can’t afford the normal prices charged by ISPs – but those folks also can’t afford the broadband prices available in rural areas today. Rural ISPs can’t shouldered with providing the low rates so that folks can afford broadband. ISPs can’t be forced to somehow fund the end of the ACP – particularly in rural areas. Anybody who has ever operated any business knows that operating with too-low rates is a road to eventual financial disaster.

BEAD Grant Contracts

One of the steps in the BEAD grant program that isn’t being talked about is the contract that an ISP must sign with a broadband office before officially being awarded a grant. While the whole industry has been focused on creating a good grant application, the grant contract is the most important document in the grant process because it specifically defines what a grant winner must do to fulfill the grant and how they will be reimbursed.

The grant contract is going to define a lot of important things:

  • This is the document that will define the line of credit that must be provided. If an ISP has elected a line of credit that can be decreased over time, make sure that contract defines the specific events that will allow for a reduction in the size of the line of credit.
  • The contract is going to define the specific environmental studies that are required, along with the timing of the environmental work. A lot of BEAD grant recipients are going to be disappointed if they are required to complete time-consuming environmental studies before starting any other work. Note that just like the rest of the industry, the folks who do environmental studies are likely to get quickly backlogged with BEAD work and may take a lot longer than normal.
  • The contract is going to define how the Broadband Office envisions implementing the many issues that were in the grant application. Regardless of what an ISP might have proposed in the grant application, the Broadband Office is going to try to use the contract to impose their will for items like setting rates. It’s important to note that an ISP doesn’t get what they proposed in the BEAD grant application – the real negotiation for how the grant is going to work happens in agreeing to a contract.
  • Perhaps the most important part of the contract is that it is going to define how the ISP will get reimbursed for completed work. There are many States that are talking about reimbursing ISPs based on meeting specific milestones. Be very careful to understand specifically what this means, because it might mean waiting for many quarters, or even a year before seeing a check out of the grant office. The natural inclination of ISPs is to order all of the materials to build a network when the grant is awarded – but that is not a good idea if the payments for that material isn’t coming for a long time. Note that payments tied to milestones likely means an ISP must front all of the money for engineering and labor long before reimbursements are made. This is a use of cash that ISPs might not be expecting. The ideal reimbursement plan is one that pays for invoices on a monthly or quarterly basis as grant work is completed.
  • The grant application is going to define the terms of grant compliance. For example, the BEAD grants require a lot of details concerning the grant labor force that haven’t been included in previous grants. The contract is going to define how the ISP proves to the Broadband Office that it is complying with the many BEAD requirements. In the case of labor, and many other requirements, documented full compliance is likely going to be required before a Broadband Office ever writes the first reimbursement check.
  • The contract is likely to have an expected contract completion date. The contract might require an ISP to finish the construction in the time that the ISP proposed in the grant application – while also imposing delays with things like environmental studies, compliance, and reimbursement rules that might make it hard for the ISP to meet that schedule.

It’s important to note that ISPs are not required to sign the contract first offered to them. A grant contract is like any contract, and the terms can be negotiated – with the caveat that a Broadband Office can’t negotiate away requirements that were included in the law that created the BEAD grants. Expect to be shocked by some of the requested contract terms included in the first draft of the contract.

Finally, note that signing a contract with terms you don’t like is still binding. There have been ISPs that have walked from other grant programs when the offered contract was too harsh. Don’t be in such a hurry to get started that you sign a contract you can’t live with.

BEAD Grants and ACP

Another chance to fund the Affordable Care Program just went past when Congress finally signed legislation to approve the budgets for the current fiscal year. There was a lot of lobbying to get an extension to ACP included in one of the two budget bills that were recently enacted.

The FCC already took steps to end the program that had 23 million participants. As of February 7, the program no longer accepted new participants in the plan. The FCC required ISPs to notify ACP recipients that the last funding would be in April. The FCC might issue a partial discount in May if enough funds remain. Without Congressional action, the program will cease to exist when the funds run dry.

In October 2023, the White House asked Congress to approve an additional $6 billion to continue to fund the ACP. In a rare show of bipartisanship these days, a group of senators and representatives introduced the Affordable Connectivity Program Extension Act that would have provided $7 billion to extend ACP from unspent Covid-19 funds. Support for ACP poured in from all corners of the country from governors to local politicians. Just in my own neighborhood, the Land of Sky Regional Council Board of Delegates unanimously approved a resolution in support of ACP.

Most of the support and lobbying effort was aimed at getting ACP renewal included in the new budget bills. When that failed, the future chances to fund ACP are looking slimmer by the day.

The consequences of the end of ACP are still to play out. The BEAD legislation required ISPs requesting BEAD funds to participate in ACP, and State Broadband Offices were counting on BEAD participation as a key part of the directive of the IIJA legislation to have affordable rates. ISPs are being put under pressure to self-fund and continue the BEAD discounts. But without a mandate, very few of them will do so. I’ve heard from a number of ISPs that will extend the discounts for a few months past the end of May to see if Congress renews ACP. But it’s hard to think that many ISPs will continue discounts for long after that.

It was not unexpected that we would end up in this situation. Social programs that don’t have a permanent source of funding routinely expire when the temporary funding runs dry. The expanded child care credit that was part of the IIJA Covid funding also expired. The House passed a renewed expansion of the childcare credit, but it stalled in the Senate and also failed to make it into the newly passed budget bills.

I’ve heard rumors for years that the policymakers in DC never expected the ACP program to be permanent. The expectation of the original architects of the plan was that ISPs would bow to public pressure to fill the void when ACP ran dry. However, the giant ISPs are not likely to self-fund the discounts and smaller ISPs can’t afford to do so.

I’ve seen some recent articles that argue that the FCC could tackle at least some of the BEAD obligation out of the Universal Service Fund. Even if the FCC is willing to consider this, their normal process are slow and cumbersome and it’s hard to think it could happen much before the end of the year. But there doesn’t seem to be any talk of the Commissioners willing to tackle this.

Even if ACP gets renewed later this year, it will be a mess. The process of onboarding customers to ACP is cumbersome, and it seems likely that every customer will need to start with a fresh application. A lot of customers are likely not going to jump through the hoops a second time to get the discount.

The BEAD Subsidy of Utilities

When ISPs are asked about the impediments they encounter for building new fiber networks, they almost always list pole issues at or near to the top of the list. Why are poles of such big concern?

Building aerial fiber means putting the fiber on poles. Most poles are owned by electric utilities, although some belong to telephone companies or municipalities. Invariably, some poles have to be replaced in order to add a new fiber line. This mostly occurs when there is not enough room on an existing pole to provide for the required safe distance between wires that are required by national safety codes. The common fix for this problem is to install a taller pole and move existing wires from the old pole to the new one – the process can be agonizingly slow since the pole owner has to coordinate with existing attachers. Worse is the expense, since the new attacher has to pay the full cost of replacing the pole and moving the old wires.

But poles often must be replaced because they are obsolete or in bad condition. The FCC recently issued new pole rules which designate poles that are out of safety compliance or that are already scheduled to be replaced as ‘red-flagged poles’.  Under the new rules, a new fiber attacher will not be responsible for the full cost of replacing a red-flagged pole. We’ll have to wait to see how the new rules play out in actual practice since pole owners are likely to argue vehemently about when to assign the red-flag designation.

Regardless of why poles have to be replaced, the BEAD grants are going to be used to replace huge numbers of poles. I don’t have any easy way to estimate the number of poles that will be replaced, but it wouldn’t be surprising if it is in the millions. It’s fairly normal for aerial construction to require the replacement of 5% to 10% of poles. In places where the poles are in bad shape, this can be a lot higher.

The cost of replacing poles is built into the construction costs of adding new aerial fiber. Since BEAD will pay up to 75% of the cost of fiber construction, that means BEAD will pay up to 75% of the cost of replacing poles.

That is a huge windfall for electric utilities. In far too many cases, the poles that will replaced by BEAD should have already been upgraded and replaced by the pole owners. Depending on the local conditions in different part of the country, poles typically are expected to last from 30 to 50 years. Unfortunately, it’s not unusual for utilities to keep poles far past the expected economic life.

Fiber providers have been yelling for years that the process is unfair. They are routinely being asked to replace poles that have held other wires for decades. During that time, the pole owner collected pole attachment fees – which should have more than covered the periodic replacement cost of the poles.

Regulators blew it a long time when they didn’t require pole owners to put pole attachment fees into a sinking fund that could only be used to repair poles after storm damage or eventually replace poles. But pole owners count pole attachment fees like any other revenue stream, and it’s quickly used for something else – and in many electric companies might even use the fees to pay dividends to shareholders.

Some states have recognized the pole issue as a big problem and used a solution that has me scratching my head. These states have taken some funding from CAREs or ARPA and created a pole replacement fund to replace the worst poles in the state. This makes some sense if bad poles are a major impediment to building fiber.

But you don’t have to think about this very hard to realize that a pole replacement fund is exactly the wrong economic incentive to give to pole owners. If I’m a pole owner and my State will fund pole replacement, I’m going to cut way back on the poles that I’ll voluntarily replace. I’d let the inventory of bad poles build up and then ask for more pole replacement money. To use common political vernacular – a pole replacement fund fosters welfare for electric companies.

The FCC had an opportunity in its recent pole order to take an important step, which was to require all pole owners to create a public inventory showing the age and condition of every pole. Such a database would make it easy to spot the pole owners who are not replacing poles as needed. Without this basic data, it’s incredibly hard for regulators to force pole owners to do the right thing.

The BEAD grants will bring a lot of broadband to places that need it. It’s just a shame that a lot of the funding will be used to replace the pole inventory of utilities that failed to invest in their own networks.

Barriers to Grant Funding in Minnesota

There is a lot of broadband legislation introduced every year in State legislatures, and most States only pass a few of the dozens of bills proposed each session. Every once in a while, a particularly egregious or curious bill gets introduced.

The Blandin Foundation broadband blog recently posted the text of proposed legislation in Minnesota for House Bill HF4659 that makes it much harder to build projects with grant funding in the state. The stated purpose of the bill is to provide protection for labor and to promote safety standards. But the practical purposes of the bill is to make it incredibly hard for ISPs to use broadband grant funds.

The proposed legislation would apply to both the State’s Border-to-Border grants as well as for federal BEAD grants.

For Minnesota Border-to-Border grants, all employees working to build grants, including employees of ISPs, contractors, or subcontractors, must:

  • Be paid a prevailing wage.
  • Be provided at least 80 hours of skill training annually at no cost to the employee. At least 40 of the hours must be hands-on instruction.
  • Any employee working more than 500 hours per year must be provided with employer-paid family health insurance.
  • Any employee working more than 500 hours per year must be provided with a post-retirement benefit equal to at least 15 percent of total taxable wages.
  • If the grant office doesn’t get applications from ISPs that meet these rules, it is required to solicit applicants that will meet the new rules.

These new rules would apply to 50% of state grants awarded this year, 60% awarded in 2025, and 70% awarded in 2026 and beyond.

There are even more stringent rules for anybody applying for a BEAD grant:

  • Applicants must use a directly employed workforce instead of a subcontracted workforce to perform placing, splicing, and maintenance work on networks. Public applicants for grants can meet this requirement by partnering with an ISP that uses a directly employed workforce.
  • The criteria established by the legislation must represent 25% of the scoring criteria for winning the BEAD grant.
  • Anybody winning a BEAD grant must publicly disclose a lot of information about wages twice per year.
  • An ISP violating any of the rules would be barred from future grants.
  • Locating existing buried facilities must be done by a safety-qualified underground telecommunications installer. All construction within 10 feet of existing telecommunications infrastructure must be done by a safety qualified telecommunications installer. No less than two safety-qualified underground telecommunications installers must be present at all times during directional drilling.

This bill is such a major departure from the way that networks are built that it looks to be intended to drive ISPs away from seeking grants. Throughout the industry, network construction is largely performed by small crews of sub-contractors. These companies have never been required to carry employer-paid health insurance or post-retirement benefits. Even those that do would likely not give these benefits to employees who work as few as 500 hours in a year. Even large telcos and cable companies don’t give health insurance and retirement benefits to part-time employees.

The requirement that all technicians must be employed by the grant recipient would kill most applicants from pursuing BEAD grants. Even giant ISPs use contractors to build networks. While there are likely a few ISPs who could use 100% employees to fulfill a grant, my guess is that this requirement would drive away most potential BEAD applicants.

It’s hard to understand the motivation for the bill since it doesn’t seem to benefit any particular class of ISP. Instead, the legislation just adds more costs to ISPs willing to accept grants and makes it more expensive to build networks. The practical result would be that very few ISPS would be willing to pursue grants in the state. The motivation behind the legislation baffles me.

BEAD Pressure on Broadband Rates

State Broadband Offices and the BEAD grant process have designed grant rules that put pressure on ISPs to provide inexpensive rural broadband. But in doing so, I’m not sure that they understand the high prices that rural folks are paying for broadband today.

To provide an example, my consulting firm just finished a statistically valid broadband survey in a rural county. Most of the rural folks in this county are already spending more than $100 per month on broadband. The incumbent telephone company has largely walked away from the county, and there is no DSL available in most of the rural parts of the county. There is only one cell tower that has been upgraded to offer FWA broadband. This means that most rural residents only have access to expensive broadband.

There is one WISP that covers only a small portion of the county. The WISP’s rates are high, with a 10/1 Mbps product for $76 and faster speeds cost more than $100.

Cellular hotspots are expensive. For example, T-Mobile has hotspot plans that vary in price from 5 gigabytes of data for $20 to 50 gigabytes of data for $50. AT&T and Verizon have similar prices for hotspots. Thos rates sound low until you realize the cost of buying broadband over the data caps. For example, Verizon offers 150 gigabytes of data for $110.

The data caps on hotspots put horrendous pressure on a household. OpenVault recently said that the average U.S. home uses 641 gigabytes of data per month. It’s hard to imagine trying to restrict a home to using less than 100 gigabytes per month to keep the bill under $100 per month. During the pandemic, I talked to several parents of students working from home using a hotspot who were paying more than $500 per month through extra bandwidth fees to get the same kind of bandwidth that homes with unlimited bandwidth take for granted.

Satellite broadband is mostly over $100. Starlink prices start at $110. HughesNet advertises unlimited data, but their plans have data caps for all practical purposes. For example, a plan with 200 gigabytes of priority data costs $109.99. They label the plan as unlimited usage, but data usage above 200 gigabytes is choked to extremely slow speeds. All plans require a 2-year contract.

Viasat is even more expensive. For $119.99 per month a customers gets 100-150 gigabytes of high-speed data and then unlimited choked and slow broadband. 500 gigabytes of usage is $249.99.

In this county, most rural residents are already paying over $100 per month for broadband. Since many of the plans include data caps, 4% of residents report spending more than $150 per month.

There are state BEAD rules that are trying to force rates down to rates between $50 and $75 per month for gigabit speeds. I find several faults with these rate-setting efforts:

  • The rates the Broadband Offices are seeking are typically far cheaper than what the large cable companies charge – the companies that have the most customers in almost every state. It’s hard to think of a reason why grant offices want rural rates to be lower than urban rates, particularly when operating costs are higher in the rural areas.
  • The low rates don’t acknowledge that rural residents are already paying a lot more for inferior broadband. Do we really need to cut what folks are paying in half if they are going to upgrade from crappy broadband?
  • The high rates are counterproductive. I talked to an electric cooperative this week that has zero interest in BEAD grants due entirely to the insistence on low rates. They understand the rates necessary to win BEAD would create a losing business plan.
  • Probably most important is that the IIJA legislation strictly forbid NTIA and the States from using the grants for setting rates – and yet States are openly doing it anyway. Why isn’t the NTIA rejecting these rate plans?

This is one more issue that I find ironic about the BEAD process. The Department of Commerce and NTIA have repeatedly said that BEAD grant rules are conservative to protect taxpayers. However, putting tremendous pressure on ISPs to have low rates does the exact opposite and will put ISPs at risk for failure after taking the grant funding. There seems to be an underlying assumption that ISPs have unlimited and hidden profit reserves and can absorb whatever penalty grant folks want to invent. That may be somewhat true for a few giant ISPs, but it sure isn’t true about everybody else.

Repeating Telecom History

This is a story I’ve told before, and I repeat it from time to time since I believe we can’t ignore the history of our industry if we want to avoid the worst of it from happening again.

We let the big telcos walk away from their responsibility to maintain rural networks. That resulted in a shameful situation where rural folks were never offered working broadband, and now the telcos are even walking away from landlines. What I find saddest about this, other than the situation this has caused for rural communities across the country, is that we don’t seem to have learned any lessons from the past. It’s likely that we are again going to hand billions of dollars to giant companies to take care of rural networks.

There are a variety of factors that led to the rural mess that created the need for BEAD and other broadband grant programs. While the primary blame goes to the big companies that allowed rural networks to deteriorate, a lot of the blame also goes to regulators and government. So let me talk about them first.

I think the downward trajectory started with the divestiture of AT&T into AT&T as a long-distance company and large regional telephone companies. Regulators had an opportunity to make sure that the regional RBOC companies remained fully regulated with mandates to maintain universal service. But for some reason, regulators did the exact opposite and told each RBOC to thrive in the open market. Companies like Verizon and Bell South quickly got sucked into the Wall Street game of caring more about stock prices than running a good telephone company. I worked at AT&T pre-divestiture, and this was a huge chance after divestiture. The employees of the giant Ma Bell monopoly took pride in doing the right thing for the public. I sat near the person who took the daily calls to the executive help desk – customers could call the top guy in each state if they had a problem, and that almost always meant the problem got solved.

The newly-formed telco lobbied hard to be able to make profits over and above the low, but steady profits that could be earned by a regulated utility. Unfortunately, lobbying works when it’s done right, and the Baby Bells lobbied everybody from city councils to federal legislators. Within a few years after divestiture, the process of deregulating the big telcos began. By promising to keep residential telephone rates low, regulators across the country deregulated the big telcos from their many obligations.

The big telcos ran with the power that came from deregulation. For example, Bell South grew a cellular business that grew to rival the telco business. All the Baby Bells except US West thrived under the relaxed regulatory regime.

I hesitate to say that the folks running the Baby Bells were bad people, but from the perspective of customers, they were. Telcos that once had always put customers first were suddenly obsessed with stock prices and the bottom line. They became just another set of corporations operated by MBAs that valued the stockholder over the customer.

The changes were mostly, but not always, gradual. Verizon was the abruptest of the Baby Bells and decided early on to divest itself of its rural networks. Unfortunately, they weren’t able to sell all rural copper. In places like West Virginia, when they couldn’t find a buyer, Verizon ceased maintaining the network. I saw this happen firsthand, and it was not pretty.

But the other Baby Bells ended up in the same place, just not as rapidly. Year after year, and budget cycle after budget cycle, the big telcos cut back on maintenance. Open technician jobs weren’t replaced, and there were occasionally big layoffs to help maintain stock prices. Hardware wasn’t upgraded when needed, and copper networks went to hell. We finally got to the point where whole counties have no working DSL – the telcos just quietly got out of the business.

We are now poised to do it all over again. We have a gigantic broadband grant program that clearly favors big companies over small ones, companies that can use equity instead of debt for grant matching, and companies with the resources to pursue giant multi-county grants. Big cable companies are joining the big telcos to pursue rural grants. The big cable companies have a similar history to the telcos. One only has to talk to folks in small communities where the cable companies eliminated business offices and cut back on maintenance staff. Cable companies have neglected small markets by not making needed upgrades while bragging to Wall Street that all of their networks are state of the art.

I doubt there is anything that can be done to stop this, but we are on the verge of doing it all over again. Over the last decade we awarded tens of billions of subsidies to big telcos to improve rural broadband, and the money mostly got pocketed. I find it impossible to believe that the giant companies are going to care and nurture newly built grant networks any better than they have taken care of rural or small community networks in the past. A few big companies might try to do the right thing. But they will be under pressure to maintain earnings, and over time, they will cut staff, maintenance, and repairs – and the cycle will eventually repeat. It’s virtually impossible to believe that the giant ISPs will devote the needed resources for decades to come to properly support rural networks.

The ironic thing is that we know what works in rural areas  and it’s not giant ISPs. We’ve seen small telcos and cooperatives take care of rural networks while big companies let networks rot in place. But lobbying is still king, and regulators are not brave enough to do the right thing – which is to not give grants to publicly traded companies. Watching this cycle repeat itself will give me fodder to write about how we screwed it all up again – but I’d much rather be writing about rural success stories.

Is There Enough BEAD Funding?

There is a tendency to think of high-cost areas – places where it’s expensive to build fiber as only being in remote places with tough terrain. As companies start filing BEAD grants we’re going to see a lot of other cases of high cost locations that I think are going to surprise State Broadband Grant offices. There are many reasons that drive up the cost of building a landline network.

Some places are high-cost by definition. For example, I know of a small town in Arizona that is fifty miles away from the nearest other people. Building fiber to this town means building middle-mile backhaul, which in this case is through tough terrain and faces the extra burden of aging poles.

The condition of poles can be a huge cost driver anywhere. I’ve worked with several rural communities where more than 90% of poles need major work to add fiber. This is clearly the fault of the electric company, but an ISP building fiber is expected to pay to rebuild the poles. The new FCC pole rules might make this a little better, but even those rules can’t make costs reasonable when all of the poles are bad.

In Appalachia, I’ve seen places where pole lines have not been maintained and the poles are now in the middle of the woods. For purposes of adding fiber, these poles might as well not exist.

The issue that is going to blindside a lot of grant offices is housing density, measured by the number of residences per mile of road. States have been operating state broadband grants that invited ISPs to seek funding to build the parts of counties with the highest route density. The same thing happened with federal broadband grants. ISPs carefully crafted grant areas where the construction costs were the most reasonable.

The billions spent by state broadband grants using CARES and ARPA money were awarded to the most densely populated rural areas. This was bound to happen with grant programs that expected fairly high matching contributions from ISPs. ISPs carefully carved out proposed grant areas that avoided high cost roads, and state grant rules rewarded grant applications that served the most locations per grant dollar. This was a smart use of state grant funds, but the end result of the many state grants is that the remaining rural locations in many counties are those places where costs are the highest.

Another factor that is driving up costs is the way that the FCC awarded RDOF. I’ve been talking for years about how the RDOF awards chopped many counties into swiss cheese serving areas, with seemingly random areas that got RDOF next to areas with the identical broadband options that didn’t. I’m working with a county where RDOF and State grants covered about 80% of rural residents. In doing so, RDOF left behind scattered pockets of the least dense homes. The cost to build the entire rural area that includes RDOF is around $6,000 per passing – a cost that could be comfortably handled by BEAD grants. However, the remaining 20% of locations have a cost per passing over $10,000.

Another major issue to consider is the degree to which inflation and BEAD grant rules are driving up the cost of construction. BEAD rules can easily add up to 30% to the cost of building a rural network due to factors like prevailing wages, letters of credit, and environmental studies. Most engineers I know estimate that inflation has increased costs by 15% to 20% since the date when BEAD grants were announced.

Finally, I think broadband offices are relying too heavily on using fixed wireless as the solution for high cost areas. There are places where fixed wireless is a good solution, but plenty of others where it is not. Areas with rough terrain can be a nightmare for a WISP that is required to reach every home. Some of the small pockets left behind by RDOF and other grants are isolated and not near any WISP markets – and no ISP wants to take on tiny pockets of customers that are far from existing networks.

Hopefully I’m being pessimistic, but I fear that states are often basing their estimates of how far BEAD grants will stretch based on the cost to build to rural areas with State broadband grants. When I look at real counties, I’m seeing that the areas that are left behind by earlier funding efforts are the most expensive places to reach. I cringe when I hear States that say that they have enough money to build fiber everywhere before they have received grant applications.

The Advantages of Equity Funding

A large majority of ISPs seeking BEAD grants will be financing matching funds using loans. Matching funds are the contributions expected from ISPs – a 75% grant means 25% in matching funds. Very few ISPs carry enough cash on hand to consider using equity to pay for broadband expansion. It’s possible that banks might require a small ISP to provide a small amount of equity, so the ISP has some skin in the game – but most matching funds will be borrowed.

This contrasts significantly with large telcos and cable companies that will be pursuing BEAD grants. It’s likely that most giant ISPs will be financing grants with equity. Using equity makes a gigantic difference in the approach to considering BEAD grants.

Below is a chart that is based on a real rural broadband market. The grant opportunity would bring fiber broadband to 2,700 locations for a total investment of $30.7 million. That’s a cost per passing of a little less than $11,400.

The following chart assumes that ISPs would seek a 75% grant and require a 25% match. The graph looks at the method of financing the matching funds – and ranges from 100% bank loan to 100% equity.

This graph demonstrates the huge benefit of using equity financing. The bottom blue line shows the expected accumulated cash for the small ISP that would use debt to cover the grant matching. For many years, the project just barely breaks even, but over twenty years, the project eventually accumulates over $2 million in cash.

An ISP that can finance with equity will generate far more cash. An ISP that could use 100% equity would accumulate over $16 million in cash over 20 years. The extra cash comes from the savings on debt payments over the life of the project.

This chart demonstrates a few things. First, it explains why ISPs that will be using equity can consider building in rural areas. In places where an ISP using debt financing can barely keep its head above water, an equity-funded ISP can generate significant cash.

The second benefit is that an ISP using equity can win the BEAD grant by accepting less than a 75% grant. In this example market, the ISP using debt financing cannot consider accepting less than a 75% grant. If they take a smaller grant the project will lose money every year. However, an ISP using equity could easily accept a 60% or 65% grant – which would almost certainly win the grant if competing against an ISP using debt.

I’ve said for years that the big ISPs are mostly going to go to the big ISPs, and funding is perhaps the major reason for this. But other grant rules also favor big companies over small ones.

But there is one more issue to consider that makes me wonder why the big ISPs are pursuing BEAD. An ISP that would use 100% equity for this particular project would see a return on Investment (ROI) over ten years of 19% and over 20 years of 88%. That is considerably lower than the returns the big ISP could earn by instead building fiber in larger communities. And those returns will drop significantly if the ISP accepts less than a 75% grant.

I’ve wondered since the day the BEAD grants were announced why big ISPs would pursue rural grants. It’s just as hard for them to service rural customers as it is for smaller ISPs. Rural BEAD projects will not earn the same kind of return that big ISPs get from investing elsewhere, and they are taking on serving areas that require a lot more work.

In many cases, the reasons for pursuing rural grants are likely strategic rather than economic. For example, Charter and Comcast seem to be panicking about the prospect of losing broadband customers, and pursuing rural markets can help to soften the losses. The big telcos like Frontier, Brightspeed, and Windstream already operate in rural areas and want to claim monopoly areas again. But in a decade, all of these companies will be complaining to the FCC about how expensive it is to operate in rural areas – and they’ll have their hands out asking for subsidies.